The Concept of “Up-Front Fee” Fraud

Copyright 2007, 2009 STILAS - All International Rights Reserved.

The term “Up-Front Fee” became synonymous with fraudulent scams after a series of
popular schemes beginning in the United States during the 1960’s and reaching their peak in
the 1970’s. These schemes were based upon the promoters promising immediate access to
unrealistically low interest rate loans, in exchange for the payment of an upfront fee.
(Professor James E. Byrne, The Myth of Prime Bank Investment Scams, Institute of
International Banking Law and Practice, Inc. (3 rd Edition, 2002), p.8, citing Office of the
Comptroller of Currency (OCC) of the US Treasury Department, Banking Circular BC 141 of
July 7, 1996.)

Commonly, the upfront fee would be in the form of a “commitment fee”. Much of the fraud
involved brokers receiving such fees purportedly on behalf of the lender, which led to the
popular “safe practice” of borrowers insisting that they pay the fees only directly to a lender.
That led to many brokers fraudulently claiming to be “direct lenders”, who in fact were only
brokers attempting to charge such fees. According to the US Federal Trade Commission
(FTC), “scam artists often impersonate legitimate lenders to entice consumers into falling for
their bogus offer.” (US Federal Trade Commission (FTC), FTC Facts for Consumers, The
Truth About Advance-Fee Loan Scams, May 2005.)

The Metropolitan Police Service of London (founded in 1829, traditionally known as

“Scotland Yard”, and now located at “New Scotland Yard”), defines and clarifies “advance
fee fraud” to be “proposals purely designed to facilitate victims parting with money.” It
explains that fraudulent “advance fees” are paid in reliance on, and collected only on the
basis of, fictitious and non-existent financial schemes that “are designed to part the unwary
from their money.” (Metropolitan Police Service of London, Specialist Crime Directorate
(SCD) Operational Command Unit (OCU) on “Economic and Specialist Crime” (“SCD-6”),
Standing Fraud Alert – “High Yield Investment Fraud”.)

New Scotland Yard emphasizes that the term “advance fee fraud” is really primarily used to
describe the infamous “Nigerian scams”, also known by UK law enforcement as “West
African” or “419” Fraud (named after Section 419 of the Nigerian Penal Code that makes
such fraud a criminal violation, as amended by the Nigerian Presidential Decree No.13 of
April 1995 entitled “Advance Fee Fraud and other Fraud Offenses Decree”.). All of these are
based on the false promise of a “guaranteed” or “certain” payment of a large sum of money
to the victim. The windfall profit of money promised is usually claimed to be some “secret”
government funds or “hidden” private wealth, and is promised to be shared with the victim.
The fraudsters either represent at the beginning that an upfront payment will be required
(such as a “Golden Key” to “unlock” some “blocked” funds waiting to be paid), or more often,
“just when the money is about to be transferred some unforeseen difficulty suddenly occurs
and fees from the victim are necessary to overcome the problem.” (Metropolitan Police
Service of London, “SDC-6” Economic and Specialist Crime, Standing Fraud Alert – “419
Fraud / Advance Fee Fraud”.)

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Up-front fee fraud should not be confused with legitimate professional services necessary to
make an investment project “bankable” or qualified to receive loans or financing. Firms who
do not falsely claim to be a lender, and promise tangible deliverable work reasonably
calculated to make the project qualified for funding, charge valid retainers for real work of
definite benefit to paying clients.

This article is a brief extract from one of a series of expert reports developed by STILAS, in
cooperation with certain federal law enforcement and national security agencies of multiple
countries, for protection of national critical infrastructure in the private sector.